When it comes to ETFs, I like to keep things quite simple and cheap. A low-cost Vanguard ETF that plays the S&P 500 is a great way to bet on the market and be done with it. Putting a portion of every paycheque into the ETF could be a wise move that allows you to think less about what to buy, when to buy, and all the sort, as you automate and focus on other things.
Of course, there’s one small issue with just buying the S&P 500 and being done with it. The index isn’t as diversified as it used to be, not after the glorious rise of the mega-cap tech stars, which have suddenly grown to contribute a growing chunk of the index. Indeed, it’s a cap-weighted index, so the more the top-heavy tech titans appreciate, the more exposure you’ll get from the S&P 500.
While the S&P 500 isn’t quite as heavy at the top as the Nasdaq 100, I do think that investors seeking exposure beyond tech (think the bottom 490 companies in the S&P 500) might wish to explore other ETF options. Indeed, betting beyond the U.S. market and the tech sector seems prudent at a time like this, when most others around you are getting just a tad too overexcited about AI technology and how productivity could surge by leaps and bounds.
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The VFV might be my go-to ETF
While I’m personally comfortable with the S&P 500 and a quick and easy ETF such as the Vanguard S&P 500 ETF (TSX: VFV), which is a great one-stop shop for your TFSA or non-registered account (a U.S.-traded version of the ETF is a better fit for an RRSP, given the 15% U.S. dividend withholding tax), not everyone wants all that tech exposure.
For more cautious value-conscious investors, perhaps an ETF like the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) could be a great addition as well. Like the S&P 500, though, the sector mix isn’t going to sit well on its own unless, of course, you’re fine with heaviness in the financial and energy sectors.
Either way, I think pairing something like the VFV or the VDY with an internationally focused ETF could be the way to go. And, of course, to balance your sector exposure, I’m a fan of sector ETFs, especially the SPDR series, which trade on the U.S. market.
Don’t forget to pair the core of your ETF with other great diversifiers
Sure, sector ETFs on their own aren’t the best. But for someone looking to achieve the optimal sector breakdown for a TFSA or RRSP, I think they’re great tools to have, especially if you’re looking to balance things out for better diversification and perhaps a better risk/reward trade-off. Just be careful not to chase performance, as a lot of investors look to sector ETFs for what’s working with the assumption that it’ll continue to work into the future. It’s tempting to double down on the sector that’s up the most in the past year or so while forgetting about the relative underperformers.
The bottom line
Despite the shortcomings of the VFV, especially as big tech continues to move higher, I’m sticking with it for the long haul. Though I think supplementing it with other ETFs is the optimal move. Yes, an S&P 500 ETF is overly simplistic, it’s boring, and it’s obvious. But, nevertheless, it’s a go-to ETF, in my humble opinion, for the very core of a long-term growth portfolio.
